More Stimulus, or Faster Growth?

By Richard A. Posner

My post of February 8, which argued that the only way out of our fiscal dilemma is more rapid economic growth, and proposed some possibly politically feasible public measures for accelerating growth, elicited a number of interesting comments.

One comment noted that repeal of the drug laws, which was one of my suggestions, is not realistic, and that is true. What I should have said is that, as a start toward decriminalization, state and federal law enforcement authorities should devote fewer resources to investigating and prosecuting drug crimes, and should propose less severe sentences to judges; these measures could reduce the prison population considerably, perhaps without provoking too great a public outcry. They would also operate as a social experiment: we would learn what the consequences are--the balance of costs and benefits--of scaling down the "war on drugs."

Another comment makes the excellent suggestion that states (including their political subdivisions, such as cities and counties) should try to rein in public employees' wages and benefits. Because of widespread unionization of public employees and, more important, the reluctance of states to play hardball with their employees, because their employees are voters, public employees tend, except at the very highest level, to be paid higher salaries and receive more generous health and other fringe benefits than their private counterparts, even though they are on average less productive because they have de jure or de facto tenure. The current hostility to government, and the fiscal binds that most of the states are in, make this an auspicious time for the reform of public employment.

One reason for the unpopularity of the stimulus is that so much of it went to the states, where it was used in significant part to save public-employment jobs. The appearance is of the government's using stimulus to pay its own! Persons who lost or fear losing their private-sector jobs are outraged. And the pressure for reform of public employment is relaxed. It is a prime example of the poor design of the $787 billion (now being estimated at $862 billion) stimulus package, and the bad consequences of that bad design.

Of course like almost any measure designed to stimulate long-term growth (in the case of reform of public employment by reducing government expenditures, increasing the productivity of public employees, and nudging some of them into the private sector), its immediate implementation would impede the recovery of the economy from its current dire state. What makes both recovery and reform so difficult is that they are at war with one another in the short term--and no one knows how long the short term is.

Apart from education reform, none of the Administration's economic policies or proposals seems oriented toward increasing the rate of economic growth, with the possible but I think quixotic proposal to double U.S. exports in the next five years. If we doubled exports without increasing imports, the resulting inflow of dollars would enable us to pay down our public debt. But the only way to increase exports substantially without increasing imports would be to devalue the currency, which is not proposed. And even that wouldn't work for long, because other export-oriented countries would devalue their own currencies in response. The broader point is that other exporting nations aren't going to sit by passively while our exporters steal their markets. Most important, the balance between goods manufactured for consumption abroad and goods manufactured for consumption at home does nothing for economic growth per se if the same amount of goods are manufactured.

If some version of the Administration's health care reform is enacted, it will expand the health care sector of the economy, but will not promote economic growth.

Least promising of all is government subsidization of industries, whether the automobile industry or industries that produce windmills or other "green" products, on the theory that investment in them will be more productive than investment in other industries. There may be reasons for such programs, but the reasons do not include stimulating eonomic growth. Governments are less able than the private sector to spot promisng new economic opportunities to which investment should be directed.

The Administration's continued effort to stimulate economic recovery by reducing unemployment is an impediment to increasing the rate of economic growth, because it adds to the public debt, thus increasing the amount of interest on government securities that flows out of the country. But it seems that these efforts are likely to be too modest to add much to the public debt, because growing public concern with deficits has reduced the political pressure for further stimulus.